ADOBE UPDATE and CPI COMMENTS

BRIEFING.COM

Story Stocks Updated: 23-Mar-05

Quotes at time of story, top stories today:(ADBE 10:55)

Mar 23, 10:55am ETAdobe Systems (ADBE) $67.18 +0.82 The last time we wrote a Story Stock on Adobe, we noted that some of the luster had come off the potential for the company and was reflected in the shares. Today, it appears that some of the fears from our last story have arrived. Google has released free software that includes many of the same features as PhotoShop, a core product in Adobe's suite, of which Acrobat is the flagship. A core element of most positive recommendations for Adobe in the past six months has been the growth of digital photography. Expectations were high that digital cameras and camera phones would be among the top sellers in the Christmas season. The rationale was that manipulation of digital photos would be the natural progression to the growth of digital cameras, to take out the hated "red eye," improve the contrast, or crop out the ex-boyfriend. The expectations were that Adobe would be the natural beneficiary of this new cultural adoption of digital snapshots. However, that's not what happened. Instead, it appears that what most consumers like to do is upload their photos to websites where they are easily shared with friends and family. In fact, now that this trend has become obvious, there have been a number of M&A deals recently in this space, including Hewlett Packard snapping up SnapFish, one of the most popular sites. Yahoo has also got involved into the space with a recent purchase of a similar entity. So how does this change of expectations for the future of digital photography affect Adobe? Certainly expectations that PhotoShop would become the widespread standard for consumers have fizzled. The model for the internet "photo-album" sites provides free storage space to build a free storage up front, with the idea of selling add-on services of various kinds. PhotoShop is far more advanced than most web-site based digital photo Java-script software, but the single-computer-license model doesn't fit this new model. Until Adobe decides to somehow drastically alter the business model for PhotoShop, there probably won't be a revival of expectations that PhotoShop will benefit from the inevitable digital photography boom. Adobe Acrobat, now at Release 7.0, is still the industry standard for electronic document distribution. However, like many software products, it is hard to make an argument that anyone really needs Release 8.0, whatever features it might contain. Adobe, like many other companies in the industry, has matured as a business. How strong growth is generated now is This speaks to the idea that Briefing.com has been stating for some time, that the software industry has reached maturity. Going forward, growth will likely only come through acquisition for most software companies. At this stage, Adobe is clearly a hold, not a buy and not a sell. The company needs to somehow explain to Wall Street where the next growth wave is. The "digital photography boom" argument probably backfired, since that boom definitely arrived, but it turns out Adobe had the wrong kind of surfboard. It won't be enough now to simply point to the next coming secular boom. Adobe will have to prove they have the right product at the right time.
Mar 23, 09:08am ETPage One - CPI Adds to Inflation Woes : The CPI this morning has heightened concerns about inflation raised yesterday by the Federal Reserve. Market conditions are not getting any better.Yesterday, the Federal Reserve raised the fed funds rate target 1/4% to 2 3/4%. That was fully expected. They also kept the measured approach language in their statement. The market was roiled, however, by Fed comments about inflation. The Fed statement that inflationary pressures were building and that pricing power is picking up was, in fact, nothing spectacular. Those trends are clear to anyone that has looked at the inflation data and read recent corporate statements. It does, however, reflect significant concern on the part of the Fed and that means rates are going higher. Perhaps significantly higher. The CPI data haven't helped. February core CPI was up 0.3%. It was expected at 0.2%, and had been at that level for four straight months. If it settles into a pattern of 0.2% to 0.3% per month, that would be a 3% annual rate. That is up sharply from just above 1% a year ago. If the core CPI runs near 3%, the fed funds rate may have to head towards 4% given the strength in the economy. That would imply a 10-year note yield of as much as 5 1/2%. The outlook for higher inflation and interest rates is a definite negative factor for the stock market right now. The market will remain extremely sensitive to any bad news on inflation, while good news on inflation will be seen as aberrant. The view is shifting. The corporate news is better. After the close yesterday, Oracle produced what appeared to be a good earnings report for the February quarter. Profits and revenue were ahead of expectations for the February quarter, and the company said current quarter profits would be better than Wall Street expected. Some analysts were disappointed by the makeup of revenue, but the report overall is good. Economic and earnings data will continue to be bullish for the stock market. Inflation and interest rates will not. The market is priced for the good news, but not the potential bad news. Economic growth is not likely to exceed already high expectations, but the market will continue to struggle for a while as it incorporates a new inflation and interest rate outlook.Dick Green, Briefing.com
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